Climate risks
Climate change has the potential to significantly affect federally regulated financial institutions and the Canadian financial system.
Categories of climate-related risks
There are 2 categories of climate-related risks:
- Physical risks arising from:
- the increasing severity and frequency of climate-related extremes and events
- longer-term gradual shifts of the climate
- indirect effects of climate change such as public health implications
- Transition risks come from the process of adjustment towards a low-greenhouse gas economy, and can emerge from:
- current or future government policies, legislation, and regulation to limit emissions
- technological advancements
- changes in market and customer sentiment
Physical and transition risks can also lead to liability risks. These can include:
- the risk of climate-related claims under liability policies
- litigation and direct actions against financial institutions for failing to manage their climate-related risks
Difficult to predict, but far-ranging
These risks are difficult to predict, but they’ll affect most sectors of the economy to some degree. They can have an impact on a financial institution’s or pension plan’s soundness by driving traditional financial risks, such as credit, market, liquidity and insurance risks. They can also lead to strategic and operational risks and adversely impact a financial institution’s reputation.
Potential impacts on the financial system
Each type of risk can affect Canada’s financial system. Here are a few examples:
Physical risk
Climate-related events could cause:
- a negative effect on a financial institution’s operations if its real estate or infrastructure are damaged
- insurance companies may face a higher number of claims for property damage
- a decrease in the value of financial institutions’ and pension plans’ investments, such as through commercial real estate exposure
Transition risk
Policy changes or new technologies that reduce emissions can cause:
- disruptions in business strategies
- adverse labor market outcomes in affected industries
- damage to a financial institution’s reputation, whether they support climate change initiatives or not
Liability risk
Physical and transition risks can lead to liability risks, such as legal action against financial institutions for failing to manage their climate-related risks.
What we’re doing to mitigate the risk
To be resilient in the face of climate-related risks, financial institutions need to develop climate-related risk strategies and implement risk management practices.
A guideline on climate risk management
We’re helping prepare federally regulated financial institutions to navigate the challenges posed by climate-related financial risks with Guideline B-15: Climate Risk Management. This will contribute to continued public confidence in Canada’s financial system.
Climate Risk Forum
The Climate Risk Forum aims to build financial sector awareness and capacity to respond to climate-related risks through engagement. It brings together OSFI, our domestic partners, and stakeholders.
Climate Risk Returns
We published draft Climate Risk Returns for consultation in partnership with the Bank of Canada and the Canada Deposit Insurance Corporation. Upon finalization, the returns will collect climate-related emissions and exposure data directly from federally regulated financial institutions, which will enable OSFI to carry out evidence-based policy development, regulation, and prudential supervision as it pertains to climate risk management.
Standardized Climate Scenario Exercise
We published a draft methodology for a Standardized Climate Scenario Exercise (SCSE). The SCSE aims to increase federally regulated financial institutions’ understanding of their potential exposures to climate-related risks. It also aims to build their capacity to conduct climate scenario analysis and risk assessments.